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Sears Canada Reports First Quarter Results

Company Also Announces Normal Course Issuer Bid and E.J. Bird as Chief Financial Officer

TORONTO, May 22, 2013 /CNW/ - Sears Canada Inc. (TSX: SCC) today announced its unaudited first quarter results.  Total revenue for the 13-week period ended May 4, 2013 was $867.1 million compared to $928.0 million for the 13-week period ended April 28, 2012, a decrease of 6.6%.  Same store sales decreased 2.6%.

The net loss for the quarter this year was $31.2 million or $0.31 cents per share compared to net earnings of $93.1 million or $0.91 cents per share for the same period last year.  Included in the net earnings for the first quarter last year was a pre-tax gain of $164.3 million related to the lease terminations of three stores as announced by the Company on March 2, 2012.  Excluding the gain from lease terminations, the net loss in the first quarter last year was $44.9 million.  Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) for the 13-week period ended May 4, 2013 was a loss of $9.8 million compared to a loss of $22.7 million for the 13-week period ended April 28, 2012, an improvement of $12.9 million.

"We are encouraged to see significant improvements in areas that we have targeted with our Transformation, particularly in the soft lines businesses," said Calvin McDonald, President and Chief Executive Officer, Sears Canada Inc.  "We experienced year over year growth in Apparel and Accessories for the second quarter in a row, the first time this has happened in over six years.  The Bed and Bath category has also improved this quarter compared to the same period last year.  Our Major Appliances business maintained market share but experienced sales declines, as did our Furniture and Mattress businesses all of which suffered in a very tough quarter of trading because of unfavourable economic conditions and low consumer confidence.  The unseasonable cool spring in most parts of the country had an adverse impact on sales of outdoor power equipment, patio, and other seasonal lines.

"We are continuing to make progress in our Transformation, and we believe the growth in Apparel and Accessories is an indicator that we are on the right track," continued Mr. McDonald.  "At the same time our rate management initiatives have positively impacted gross margin by 50 basis points, while our focus on controlling costs has reduced expenses by 7.9% compared to the same period last year.  Factoring out the gains from the return of the three leases to the landlord last year, we are seeing an overall improvement in our bottom line for the quarter as compared to the first quarter last year.

"The efforts of our 29,000 associates are a key component in making the Company's three-year Transformation a success.  While their hard work is starting to bear fruit, there is still work to do," added Mr. McDonald.

Adjusted EBITDA is a non-IFRS measure, and excludes finance costs, interest income, share of income or loss from joint ventures, income tax expense or recovery, depreciation and amortization and income or expenses of a non-recurring, unusual or one-time nature.  Please refer to the table attached for a reconciliation of net earnings (loss) to Adjusted EBITDA.

Normal Course Issuer Bid

The Company also announced today that it intends to file with the Toronto Stock Exchange ("TSX") a Notice of Intention to make a Normal Course Issuer Bid that permits the Company to purchase for cancellation up to 5% of its issued and outstanding common shares, representing 5,093,883 of the issued and outstanding common shares ("Shares").  There are 101,877,662 Shares issued and outstanding, as at May 10, 2013.

Under the Normal Course Issuer Bid, which is subject to TSX approval, purchases may commence on May 24, 2013 and must terminate by May 23, 2014 or on such earlier date as Sears Canada may complete its purchases pursuant to the Notice of Intention filed with the TSX.  The total purchase of Shares by Sears Canada pursuant to its Normal Course Issuer Bid will not exceed, in the aggregate, 5% of all outstanding Shares, and will be subject to the limits under the Toronto Stock Exchange rules, including a daily limit of 25% of the average daily trading volume (which, based on the prior six months trading volumes, cannot exceed 19,689 Shares a day), and a limit of one block purchase per week (which is not subject to an average daily trading volume limit).

The Board of Directors believes that, if the Company is able to purchase Shares at attractive prices, such purchases will create value for the Company and its continuing shareholders while providing additional liquidity to shareholders who desire to sell their Shares.  The Company may not purchase Shares under the Normal Course Issuer Bid if Shares cannot be purchased at prices that the Company considers attractive and decisions regarding the timing of purchases will also be based on market conditions and other factors. Therefore, there is no assurance that any Shares will be purchased under the Normal Course Issuer Bid and the Company may elect to suspend or discontinue the bid at any time.

Sears Canada will report to its shareholders in its quarterly and annual reports as to the status of the Normal Course Issuer Bid.  All purchases of Shares pursuant to its Normal Course Issuer Bid will be made by Sears Canada in accordance with the rules of the TSX and effected through the facilities of the TSX. Moreover, Sears Canada will make no purchases of Shares other than open market purchases. Any Shares purchased will be cancelled.

In the twelve month period preceding May 10, 2013, Sears Canada purchased 634,870 common shares for cancellation at a weighted average purchase price of $10.84 per share.

Sears Canada may, from time to time, enter into an automatic purchase plan with a designated broker to allow for the repurchase of its common shares under the Normal Course Issuer Bid at times when Sears Canada ordinarily would not be active in the market due to its own internal trading blackout periods, insider trading rules, or otherwise.

Sears Canada Appoints Chief Financial Officer

The Company is also announcing today that the Board of Directors of the Corporation has appointed E.J. Bird as Executive Vice-President and Chief Financial Officer.  Mr. Bird was appointed Interim Chief Financial Officer on March 12, 2013.  Mr. Bird will also continue to serve as a Director of Sears Canada, a role he has held since 2006.

"I'm pleased to have E.J. join Sears Canada on a permanent basis as our CFO," said Mr. McDonald.  "He brings a significant amount of experience to the role, and having served as Interim CFO for the past two months, he will be able to step into the role in what is expected to be a seamless transition.  I thank him for the leadership he has demonstrated to date and look forward to working with him on a permanent basis."

As mentioned in the Company's March 12 release, Mr. Bird attended Baylor University in Waco, Texas where he graduated summa cum laude with a Bachelor of Business Administration, majoring in Accounting.  He earned his MBA at Stanford's Graduate School of Business in California where he was an Arjay Miller Scholar.  In between degrees Mr. Bird worked in the audit department of Price Waterhouse's Houston office.  He has worked extensively in the investment arena, is a director at Sears Hometown and Outlet Stores, Inc. of Hoffman Estates, Illinois and has most recently led his own company business providing consulting services.

In addition, the Company is also announcing that Donald C. Ross has been appointed Lead Director of the Corporation and that Deborah E. Rosati has been appointed Chair of the Audit Committee.

This release contains information which is forward-looking and is subject to important risks and uncertainties. Forward-looking information concerns the Company's future financial performance, business strategy, plans, goals and objectives.  Factors which could cause actual results to differ materially from current expectations include, but are not limited to: the ability of the Company to successfully implement its cost reduction, productivity improvement and strategic initiatives and whether such initiatives will yield the expected benefits; the results achieved pursuant to the Company's long-term marketing and servicing alliance with JPMorgan Chase Bank, N.A.;  general economic conditions; competitive conditions in the businesses in which the Company participates; changes in consumer spending; seasonal weather patterns; customer preference toward product offerings; changes in the Company's relationship with its suppliers; interest rate fluctuations and other changes in funding costs; fluctuations in foreign currency exchange rates; the possibility of negative investment returns in the Company's pension plan;  the outcome of pending legal proceedings; and changes in laws, rules and regulations applicable to the Company.  While the Company believes that its forecasts and assumptions are reasonable, results or events predicted in this forward-looking information may differ materially from actual results or events.

Sears Canada is a multi-channel retailer with a network that includes 181 corporate stores, 248 hometown dealer stores, over  1,400 catalogue and online merchandise pick-up locations, 101 Sears Travel offices and a nationwide home maintenance, repair, and installation network. The Company also publishes Canada's most extensive general merchandise catalogue and offers shopping online at www.sears.ca.

SEARS CANADA INC.
RECONCILIATION OF NET EARNINGS (LOSS) TO ADJUSTED EBITDA
For the 13-week period ended May 4, 2013 and April 28, 2012
 
Unaudited
    First Quarter
(in CAD millions, except per share amounts)   2013     2012
Net (loss) earnings   $ (31.2)   $ 93.1
   Transformation expense1   1.5    
   Gain on lease terminations2       (164.3)
  Depreciation and amortization expense   30.2     32.3
  Finance costs   2.3     4.5
  Interest income   (0.4)     (0.6)
   Income tax (recovery) expense   (12.2)     12.3
Adjusted EBITDA3   (9.8)     (22.7)
Basic net (loss) earnings per share   $ (0.31)   $ 0.91

1 Transformation expense during 2013 relates to severance costs incurred during the year.
2 Gain on lease terminations represents the pre-tax gain on the early surrender and return of leases on three properties during Q1 2012.
3 Adjusted EBITDA is a measure used by management, the retail industry and investors as an indicator of the Company's performance, ability to incur and service debt, and as a valuation metric. Adjusted EBITDA is a non-IFRS measure.
   

 
TABLE OF CONTENTS
Exhibit 99.2
 
Unaudited Condensed Consolidated Financial Statements
  Condensed Consolidated Statements of Financial Position  
  Condensed Consolidated Statements of Net (Loss) Earnings and Comprehensive (Loss) Income
  Condensed Consolidated Statements of Changes in Shareholders' Equity  
  Condensed Consolidated Statements of Cash Flows  
   
Notes to the Unaudited Condensed Consolidated Financial Statements  
  Note 1: General information
  Note 2: Significant accounting policies
  Note 3: Issued standards not yet adopted
  Note 4: Critical accounting judgments and key sources of estimation uncertainty
  Note 5: Cash and cash equivalents and interest income
  Note 6: Inventories
  Note 7: Long-term obligations and finance costs
  Note 8: Capital stock
  Note 9: Revenue
  Note 10: Retirement benefit plans
  Note 11: Depreciation and amortization expense
  Note 12: Gain on lease terminations
  Note 13: Assets and liabilities held for sale
  Note 14: Financial instruments
  Note 15: Contingent liabilities
  Note 16: Net (loss) earnings per share
  Note 17: Income taxes
  Note 18: Segmented information
  Note 19: Changes in non-cash working capital balances
  Note 20: Changes in long-term assets and liabilities
  Note 21: Event after reporting period
     

 
SEARS CANADA INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Unaudited
(in CAD millions)   Notes     As at
May 4, 2013
      As at
February 2, 2013
(Note 2.4)
      As at
April 28, 2012
(Note 2.4)
      As at
January 28, 2012
(Note 2.4)
ASSETS                                  
Current assets                                  
Cash and cash equivalents   5   $ 109.7     $ 238.5     $ 364.9     $ 400.2
Accounts receivable, net   14     79.2       77.7       97.8       117.6
Income taxes recoverable   17     10.1       5.5       1.5       4.1
Inventories   6     891.1       851.4       883.7       823.9
Prepaid expenses         28.6       28.6       32.1       27.9
Assets classified as held for sale   13                 31.9      
Total current assets         1,118.7       1,201.7       1,411.9       1,373.7
                                   
Non-current assets                                  
Property, plant and equipment         1,098.4       1,118.5       1,176.1       1,196.1
Investment property         21.7       21.7       21.7       21.7
Intangible assets         26.0       27.2       22.5       23.6
Goodwill         8.7       8.7       8.7       8.7
Deferred tax assets   17     98.2       83.8       75.4       84.6
Other long-term assets         45.8       43.1       64.7       59.0
Total assets       $ 2,417.5     $ 2,504.7     $ 2,781.0     $ 2,767.4
                                   
LIABILITIES                                  
Current liabilities                                  
Accounts payable and accrued liabilities   14   $ 463.3     $ 483.7     $ 582.8     $ 580.8
Deferred revenue         200.1       197.8       213.7       208.0
Provisions         53.2       66.3       54.4       64.8
Income taxes payable   17                 10.9       1.0
Other taxes payable         19.2       34.0       31.5       42.9
Current portion of long-term obligations   7,14     9.2       9.2       9.1       9.2
Liabilities classified as held for sale   13                 28.4      
Total current liabilities         745.0       791.0       930.8       906.7
                                   
Non-current liabilities                                  
Long-term obligations   7,14     47.8       50.2       49.3       144.8
Deferred revenue         86.8       90.7       88.5       89.2
Retirement benefit liability   10     415.5       415.7       450.0       452.3
Deferred tax liabilities   17     5.0       6.0       5.6       5.6
Other long-term liabilities         72.2       74.7       74.5       76.8
Total liabilities         1,372.3       1,428.3       1,598.7       1,675.4
                                   
SHAREHOLDERS' EQUITY                                  
Capital stock   8     14.9       14.9       15.0       15.0
Retained earnings   8     1,177.0       1,208.2       1,308.8       1,218.5
Accumulated other comprehensive loss         (146.7)       (146.7)       (141.5)       (141.5)
Total shareholders' equity         1,045.2       1,076.4       1,182.3       1,092.0
Total liabilities and shareholders' equity       $ 2,417.5     $ 2,504.7     $ 2,781.0     $ 2,767.4

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 




 
SEARS CANADA INC.
CONDENSED CONSOLIDATED STATEMENTS OF NET (LOSS) EARNINGS AND COMPREHENSIVE (LOSS) INCOME
For the 13-week periods ended May 4, 2013 and April 28, 2012
Unaudited 
 
(in CAD millions, except per share amounts)   Notes     2013       2012 (Note 2.4)
                     
Revenue   9   $ 867.1     $ 928.0
Cost of goods and services sold   6     537.7       580.4
Selling, administrative and other expenses   10,11,14     370.9       402.6
Operating loss         (41.5)       (55.0)
                     
Gain on lease terminations   12           164.3
Finance costs   7,17     2.3       4.5
Interest income   5     0.4       0.6
(Loss) earnings before income taxes         (43.4)       105.4
                     
Income tax recovery (expense)                    
  Current   17     (2.9)       (3.0)
  Deferred   17     15.1       (9.3)
          12.2       (12.3)
Net (loss) earnings       $ (31.2)     $ 93.1
                     
Basic net (loss) earnings per share   16   $ (0.31)     $ 0.91
Diluted net (loss) earnings per share   16   $ (0.31)     $ 0.91
                     
Net (loss) earnings       $ (31.2)     $ 93.1
                   
Other comprehensive income, net of taxes:                  
                     
Items that may subsequently be reclassified to net income                  
  Mark-to-market adjustment on cash equivalents               0.1
  Reclassification to net (loss) earnings of loss (gain) on
foreign exchange derivatives
              (0.1)
                     
Total other comprehensive income              
Comprehensive (loss) income       $ (31.2)     $ 93.1

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 


 
SEARS CANADA INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the 13-week periods ended May 4, 2013 and April 28, 2012
Unaudited 
                        Accumulated other comprehensive loss (income)
           
(in CAD millions) Note     Capital
stock
      Retained
earnings
      Mark-to-market on short-term investments within cash and cash equivalents       Foreign 
exchange
derivatives
designated
 as cash
flow hedges
      Remeasurement
loss
      Total accumulated
other
comprehensive
loss (income)
      Shareholders'
equity
Balance as at February 2, 2013     $ 14.9     $ 1,208.2     $     $     $ (146.7)     $ (146.7)     $ 1,076.4
  Net loss               (31.2)                               (31.2)
  Change in fair value of call option 14                                                      
Total other comprehensive income                                          
Total comprehensive loss             (31.2)                               (31.2)
Balance as at May 4, 2013     $ 14.9     $ 1,177.0     $     $     $ (146.7)     $ (146.7)     $ 1,045.2
                                                         
Balance as at January 28, 2012     $ 15.0     $ 1,218.5     $     $ 0.2     $ (141.7)     $ (141.5)     $ 1,092.0
  Net earnings               93.1                               93.1
Other comprehensive income (loss)                                                        
  Mark-to-market gain                       0.1                     0.1        0.1
  Reclassification of gain on foreign exchange derivatives                             (0.1)             (0.1)        (0.1)
Total other comprehensive income (loss)                   0.1       (0.1)               —      
Total comprehensive income (loss)             93.1       0.1       (0.1)               —       93.1
  Repurchases of common shares             (2.8)                                       (2.8)
Balance as at April 28, 2012     $ 15.0     $ 1,308.8     $ 0.1     $ 0.1     $ (141.7)     $ (141.5)     $ 1,182.3

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 

 
SEARS CANADA INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the 13-week periods ended May 4, 2013 and April 28, 2012
Unaudited
                   
(in CAD millions)   Notes     2013       2012 (Note 2.4)
Cash flow used for operating activities                  
  Net (loss) earnings       $ (31.2)     $ 93.1
  Adjustments for:                  
    Depreciation and amortization expense   11     30.2       32.3
    Gain on disposal of property, plant and equipment         (0.2)       (0.3)
    Gain on lease terminations   12           (164.3)
    Finance costs   7     2.3       4.5
    Interest income   5     (0.4)       (0.6)
    Retirement benefit plans expense   10     6.9       7.8
    Short-term disability expense   10     2.5       2.5
    Income tax (recovery) expense   17     (12.2)       12.4
  Interest received   5     0.5       0.5
  Interest paid   7     (1.5)       (1.9)
  Retirement benefit plans contributions   10     (9.7)       (12.4)
  Income tax (payments) refunds, net   17     (8.0)       7.8
  Changes in non-cash working capital   19     (92.5)       (61.7)
  Changes in long-term assets and liabilities   20     (6.3)       (2.8)
          (119.6)       (83.1)
Cash flow (used for) generated from investing activities                    
  Purchases of property, plant and equipment and intangible assets         (6.7)       (15.7)
  Proceeds from sale of property, plant and equipment         0.3       0.5
  Proceeds from lease terminations   12           170.0
          (6.4)       154.8
Cash flow used for financing activities                    
  Interest paid on finance lease obligations   7     (0.6)       (0.5)
  Repayment of long-term obligations         (3.4)       (135.1)
  Proceeds from long-term obligations         1.1       31.7
  Repurchases of common shares   8           (2.9)
          (2.9)       (106.8)
Effect of exchange rate on cash and cash equivalents at end of period         0.1       (0.2)
Decrease in cash and cash equivalents         (128.8)       (35.3)
Cash and cash equivalents at beginning of period       $ 238.5     $ 400.2
Cash and cash equivalents at end of period       $ 109.7     $ 364.9

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. General information

Sears Canada Inc. is incorporated in Canada. The address of its registered office and principal place of business is 290 Yonge Street, Suite 700, Toronto, Ontario, Canada M5B 2C3. The principal activities of Sears Canada Inc. and its subsidiaries (the "Company") include the sale of goods and services through the Company's Retail channel, which includes its Full-line, Sears Home, Hometown Dealer, Outlet, Appliances and Mattresses, Corbeil Electrique Inc. stores, and its Direct (catalogue/internet) channel. It also includes service revenue related to product repair and logistics. Commission revenue includes travel, home improvement services, insurance, and performance payments received from JPMorgan Chase Bank, N.A. (Toronto Branch) ("JPMorgan Chase") under the Company's long-term credit card marketing and servicing alliance with JPMorgan Chase. The Company has partnered with Thomas Cook Canada Inc. ("Thomas Cook") in a multi-year licensing arrangement, under which Thomas Cook manages the day-to-day operations of all Sears Travel offices and provides commissions to the Company. The Company has also partnered with SHS Services Management ("SHS") in a multi-year licensing arrangement, under which SHS oversees the day-to-day operations of all Sears Home Improvements Product Services business ("HIPS"). Licensee fee revenues are comprised of payments received from licensees, including Thomas Cook and SHS, that operate within the Company's stores. The Company is a party to a number of real estate joint ventures which have been classified as joint operations and accounted for using proportionate consolidation for financial reporting purposes.

The indirect parent of the Company is Sears Holdings Corporation ("Sears Holdings"), incorporated in the U.S. in the state of Delaware. The ultimate controlling party of the Company is ESL Investments, Inc. (incorporated in the U.S. in the state of Florida) through Sears Holdings. 

2. Significant accounting policies

2.1 Statement of compliance

The unaudited condensed consolidated financial statements of the Company for the 13-week period ended May 4, 2013 (the "Financial Statements") have been prepared in accordance with IAS 34, Interim Financial Reporting ("IAS 34") issued by the International Accounting Standards Board ("IASB"), and therefore, do not contain all disclosures required by International Financial Reporting Standards ("IFRS") for annual financial statements. Accordingly, these Financial Statements should be read in conjunction with the Company's most recently prepared annual consolidated financial statements for the 53-week period ended February 2, 2013 (the "2012 Annual Consolidated Financial Statements"), prepared in accordance with IFRS.

2.2 Basis of preparation and presentation

The principal accounting policies of the Company have been applied consistently in the preparation of these Financial Statements for all periods presented. These Financial Statements follow the same accounting policies and methods of application as those used in the preparation of the 2012 Annual Consolidated Financial Statements, except as noted below.  The Company's significant accounting policies are described in Note 2 of the 2012 Annual Consolidated Financial Statements.

The Company adopted the following new standards and amendments which became effective "in" or "for" the 13-week period ended May 4, 2013 ("Q1 2013"):

  • IAS 1, Presentation of Financial Statements ("IAS 1")

    The IASB has amended IAS 1 to require additional disclosures for items presented in Other Comprehensive Income ("OCI") on a before-tax basis and requires items to be grouped and presented in OCI based on whether they are potentially reclassifiable to earnings or loss subsequently (i.e. items that may be reclassified and those that will not be reclassified to earnings or loss). These amendments are effective for annual periods beginning on or after July 1, 2012 and require full retrospective application. As a result of the adoption of the IAS 1 amendment, the Company modified its presentation of other comprehensive income in these unaudited condensed consolidated financial statements;
  • IAS 28, Investments in Associates and Joint Ventures ("IAS 28")

    IAS 28 (as amended in 2011) supersedes IAS 28 (2003), Investments in Associates and outlines how to apply, with certain limited exceptions, the equity method to investments in associates and joint ventures. The standard also defines an associate by reference to the concept of "significant influence", which requires power to participate in financial and operating policy decisions of an investee (but not joint control or control of those policies). Based on the Company's assessment of this amendment, there is no impact on its unaudited condensed consolidated financial statements;
  • IFRS 7, Financial Instruments: Disclosures ("IFRS 7")

    The IASB has amended IFRS 7.  The amendment establishes disclosure requirements to help users better assess the effect or potential effect of offsetting arrangements on a company's financial position. These amendments are effective for annual periods beginning on or after January 1, 2013 and must be applied retrospectively. Based on the Company's assessment of this amendment, there is no impact on its unaudited condensed consolidated financial statements;
  • IFRS 10, Consolidated Financial Statements ("IFRS 10")

    IFRS 10 establishes the standards for the presentation and preparation of consolidated financial statements when an entity controls one or more entities. Based on the Company's assessment of this amendment, there is no impact on its unaudited condensed consolidated financial statements;
  • IFRS 11, Joint Arrangements ("IFRS 11")

    IFRS 11, along with IFRS 12 described below, replaces IAS 31, Interests in Joint Ventures ("IAS 31") and requires that a party in a joint arrangement assess its rights and obligations to determine the type of joint arrangement and account for those rights and obligations accordingly. The adoption of this standard has impacted the Company as described in Note 2.4;
  • IFRS 12, Disclosure of Involvement with Other Entities ("IFRS 12")

    IFRS 12, along with IFRS 11 described above, replaces IAS 31. IFRS 12 requires the disclosure of information that enables users of financial statements to evaluate the nature of and the risks associated with, the entity's interests in joint ventures and the impact of those interests on its financial position, financial performance and cash flows. These  amendments are effective for annual periods beginning on or after January 1, 2013 and must be applied retrospectively. The adoption of these amendments did not have an impact on the Company's unaudited condensed consolidated financial statements; and
  • IFRS 13, Fair Value Measurement ("IFRS 13")

    IFRS 13 provides guidance to improve consistency and comparability in fair value measurements and related disclosures through a 'fair value hierarchy'. This standard applies when another IFRS requires or permits fair value measurements or disclosures.  Disclosures required under IFRS 13 for unaudited condensed consolidated financial statements have been included in Note 14.5.

2.2.1 Basis of Consolidation

The Company's Financial Statements incorporate the financial statements of the Company as well as all of its subsidiaries. Real estate joint venture investments are accounted for using the proportionate consolidation method of accounting. Subsidiaries include all entities where the Company has the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities. All intercompany balances and transactions, and any unrealized income and expenses arising from intercompany transactions, are eliminated in the preparation of these Financial Statements.

The fiscal year of the Company consists of a 52 or 53-week period ending on the Saturday closest to January 31. The 13-week periods presented in these Financial Statements are for the periods ending May 4, 2013 and April 28, 2012.

These Financial Statements are presented in Canadian dollars, which is the Company's functional currency. The Company reports as two operating segments, Merchandising and Real Estate Joint Ventures (see Note 18).

2.3 Seasonality

The Company's operations are seasonal in nature. Accordingly, merchandise and service revenues, as well as performance payments received from JPMorgan Chase under the long-term credit card marketing and servicing alliance, will vary by quarter based on consumer spending behaviour. Historically, the Company's revenues and earnings are highest in the fourth quarter due to the holiday season. The Company is able to adjust certain variable costs in response to seasonal revenue patterns; however, costs such as occupancy are fixed, causing the Company to report a disproportionate level of earnings in the fourth quarter. This business seasonality results in quarterly performance that is not necessarily indicative of the year's performance.

2.4 Changes in Accounting Policy

IFRS 11, Joint Arrangements

The Company adopted IFRS 11 in Q1 2013. On May 12, 2011, the IASB issued IFRS 11 which replaced IAS 31, Interests in Joint Ventures, and required that a party in a joint arrangement assess its rights and obligations to determine the type of joint arrangement and account for those rights and obligations accordingly. The Company has determined that the joint arrangements with its real estate joint ventures are joint operations and will be recognized in proportion to the Company's ownership percentage in these arrangements.

IFRS 11 is effective for annual periods beginning on or after January 1, 2013 with early adoption permitted. The amendments are required to be applied retrospectively in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors.

As the Company implemented IFRS 11 in Q1 2013, the Company has retrospectively adjusted the assets and liabilities as at February 2, 2013, April 28, 2012 and January 28, 2012 and the income, expenses and cash flow for the 13-week period ended April 28, 2012 and 53-week period ended February 2, 2013.

A summary of the impact arising from the application of the change in accounting policy is as follows: 

Consolidated Statements of Financial Position  
(Increase (decrease) in CAD millions)     As at
February 2, 2013
      As at
April 28, 2012
      As at
January 28, 2012
  Cash and cash equivalents   $ 1.5     $ 3.3     $ 2.8
  Accounts receivable, net     1.5       1.6       1.4
  Prepaid expenses     (1.5)       (1.2)      
Net change to current assets     1.5       3.7       4.2
                         
  Property, plant and equipment     278.5       322.4       324.1
  Investment in joint ventures     (263.4)       (298.8)       (301.4)
  Other long-term assets     9.0       9.1       9.8
Net change to total assets     25.6       36.4       36.7
                           
  Accounts payable and accrued liabilities     1.7       5.1       4.0
  Deferred revenue     0.3            
  Other taxes payable     0.1             0.1
  Current portion of long term obligations     4.0       0.6       4.1
Net change to current liabilities     6.1       5.7       8.2
                           
  Long-term obligations     19.3       29.6       27.2
  Deferred tax liabilities     0.2       0.2       0.3
  Other long-term liabilities           0.9       1.0
Net change to total liabilities     25.6       36.4       36.7
                       

Consolidated Statements of Net (Loss) Earnings              
(Increase (decrease) in CAD millions)     13-Week
Period Ended
April 28, 2012
      53-Week
Period Ended
February 2, 2013
Revenue   $ 12.9     $ 45.8
Selling, administrative and other expenses     9.1       34.7
Finance costs     0.5       1.8
Interest income     0.1       0.2
Share of Income from joint ventures     (3.5)       (9.5)
Income tax recovery     0.1      


Consolidated Statements of Cash Flows              
(Increase (decrease) in CAD millions)     13-Week
Period Ended
April 28, 2012
      53-Week
Period Ended
February 2, 2013
Depreciation and amortization   $ 3.5     $ 13.2
Impairment loss           2.2
Share of (income) loss from joint ventures     3.5       9.5
Finance costs     0.5       1.8
Interest income     (0.1)       (0.2)
Interest paid     (0.4)       (1.8)
Changes in non-cash working capital     3.9       18.0
Changes in long-term assets and liabilities     (0.8)       (17.6)
Additions of property, plant & equipment and intangible assets     (2.5)       (4.0)
Repayment on long-term obligations     (0.9)       (4.0)
Dividends received from joint ventures     (6.3)       (18.4)

As a result of the adoption of IFRS 11 in Q1 2013, the Company has two reportable segments:  Merchandising and Real Estate Joint Venture operations.  Refer to Note 18 for the segmented information disclosure.

3. Issued standards not yet adopted

The Company monitors the standard setting process for new standards and interpretations issued by the IASB that the Company may be required to adopt in the future. Since the impact of a proposed standard may change during the review period, the Company does not comment publicly until the standard has been finalized and the effects have been determined.

On December 16, 2011, the IASB issued amendments to two previously released standards. They are as follows:

      IAS 32, Financial Instruments: Presentation ("IAS 32")
       
      The IASB amended IAS 32 to address inconsistencies in current practice in the application of offsetting criteria. The amendments provide clarification with respect to the meaning of 'currently has a legally enforceable right of set-off' and that some gross settlement systems may be considered equivalent to net settlement. These amendments are effective for annual periods beginning on or after January 1, 2014. The Company is currently assessing the impact of these amendments on the Company's consolidated financial statements and related note disclosures.
       
      IFRS 9, Financial Instruments ("IFRS 9")
       
      This standard will ultimately replace IAS 39, Financial Instruments: Recognition and Measurement, in phases. The first phase was issued on November 12, 2009 and addresses the classification and measurement of financial assets.  The second phase of IFRS 9 was issued on October 28, 2010 incorporating new requirements on accounting for financial liabilities.  On December 16, 2011, the IASB amended the mandatory effective date of IFRS 9 to fiscal years beginning on or after January 1, 2015. The amendment also provides relief from the requirement to recast comparative financial statements for the effect of applying IFRS 9. In subsequent phases, the IASB will address hedge accounting and impairment of financial assets. The Company is monitoring the impact of amendments to this standard and is currently assessing the impact on the Company's disclosures.

4. Critical accounting judgments and key sources of estimation uncertainty

In the application of the Company's accounting policies, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and underlying assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods.

Critical judgments that management has made in the process of applying the Company's accounting policies, key assumptions concerning the future and other key sources of estimation uncertainty that have the potential to materially impact the carrying amounts of assets and liabilities within the next financial year are described in Note 4 of the 2012 Annual Consolidated Financial Statements and are consistent with those used in the preparation of these Financial Statements.

5. Cash and cash equivalents and interest income

Cash and cash equivalents

The components of cash and cash equivalents were as follows:

(in CAD millions)     As at
May 4, 2013
      As at
February 2, 2013
(Note 2.4)
      As at
April 28, 2012
(Note 2.4)
      As at
January 28, 2012
(Note 2.4)
Cash   $ 64.4     $ 49.1     $ 73.3     $ 51.8
Cash equivalents                              
  Government treasury bills           159.9       239.9       199.9
  Bank term deposits     15.0             25.0       121.0
  Investment accounts     20.6       20.5       20.3       20.3
Restricted cash and cash equivalents     9.7       9.0       6.4       7.2
Total cash and cash equivalents   $ 109.7     $ 238.5     $ 364.9     $ 400.2

The components of restricted cash and cash equivalents are further discussed in Note 15.

Interest income

Interest income related primarily to cash and cash equivalents for the 13-week period ended May 4, 2013 totaled $0.4 million (2012: $0.6 million). For the same 13-week period, the Company received $0.5 million (2012: $0.5 million) in cash related to interest income. 

6. Inventories

The amount of inventory recognized as an expense during the 13-week period ended May 4, 2013 was $489.0 million (2012: $527.4 million), which includes $24.4 million (2012: $22.6 million) of inventory write-downs. These expenses are included in "Cost of goods and services sold" in the unaudited Condensed Consolidated Statements of Net (Loss) Earnings and Comprehensive (Loss) Income. There were reversals of $3.5 million of prior period inventory write-downs for the 13-week period ended May 4, 2013 (2012: nil).

Inventory is pledged as collateral under the Company's revolving credit facility.

7. Long-term obligations and finance costs

Long-term obligations

Total outstanding long-term obligations were as follows: 

(in CAD millions)     As at
May 4, 2013
      As at
February 2, 2013
(Note 2.4)
      As at
April 28, 2012
(Note 2.4)
      As at
January 28, 2012
(Note 2.4)
Real estate joint venture obligations - Current   $ 4.1     $ 4.0     $ 4.2     $ 4.1
Finance lease obligations - Current     5.1       5.2       4.9       5.1
Total current portion of long-term obligations   $ 9.2     $ 9.2     $ 9.1     $ 9.2
Secured revolving credit facility, net   $     $     $     $ 93.1
Real estate joint venture obligations - Non-current     18.2       19.3       26.0       27.2
Finance lease obligations - Non-current     29.6       30.9       23.3       24.5
Total long-term obligations   $ 47.8     $ 50.2     $ 49.3     $ 144.8

The Company's debt consists of a secured credit facility, finance lease obligations and the Company's proportionate share of its real estate joint venture obligations. In September 2010, the Company entered into an $800.0 million senior secured revolving credit facility (the "Credit Facility") with a syndicate of lenders with a maturity date of September 10, 2015. The Credit Facility is secured with a first lien on inventory and credit card receivables. Availability under the Credit Facility is determined pursuant to a borrowing base formula. Availability under the Credit Facility was $606.5 million as at May 4, 2013 (February 2, 2013: $501.5 million, April 28, 2012: $580.9 million, January 28, 2012: $415.1 million). The current availability may be reduced by reserves currently estimated by the Company to be approximately $440.0 million, which may be applied by the lenders at their discretion pursuant to the Credit Facility agreement. As a result of judicial developments relating to the priorities of pension liability relative to certain secured obligations, the Company has executed an amendment to its Credit Facility agreement which would provide additional security to the lenders by pledging certain real estate assets as collateral, thereby partially reducing the potential reserve amount the lenders could apply by up to $150.0 million. The additional reserve amount may increase or decrease in the future based on changes in estimated net pension deficits in the event of a wind-up.

The Credit Facility contains covenants which are customary for facilities of this nature and the Company was in compliance with all covenants as at May 4, 2013.

As at May 4, 2013, the Company had no borrowings on the Credit Facility and had unamortized transaction costs incurred to establish the Credit Facility of $5.7 million included in "Other long-term assets" in the unaudited Condensed Consolidated Statements of Financial Position (February 2, 2013: no borrowings and unamortized transaction costs of $6.2 million included in "Other long-term assets", April 28, 2012: no borrowings and unamortized transaction costs of $7.7 million included in "Other long-term assets", January 28, 2012: borrowings of $93.1 million, net of unamortized transaction costs of $8.0 million, included in "Long-term obligations"). In addition, the Company had $24.2 million (February 2, 2013: $19.7 million, April 28, 2012: $6.7 million, January 28, 2012: $6.3 million) of standby letters of credit outstanding against the Credit Facility. These letters of credit cover various payments including third party payments, utility commitments and defined benefit plan deficit funding. Interest on drawings under the Credit Facility is determined based on bankers' acceptance rates for one to three month terms or the prime rate plus a spread. Interest amounts on the Credit Facility are due monthly and are added to principal amounts outstanding.

As at May 4, 2013, the Company had outstanding merchandise letters of credit of U.S. $9.5 million (February 2, 2013: U.S. $7.9 million, April 28, 2012: U.S. $6.2 million, January 28, 2012: U.S. $5.5 million) used to support the Company's offshore merchandise purchasing program with restricted cash and cash equivalents pledged as collateral.

Finance costs

Interest expense on long-term obligations, including the Company's proportionate share of interest on long-term obligations of real estate joint ventures, finance lease obligations, the current portion of long-term obligations, amortization of transaction costs and commitment fees on the unused portion of the Credit Facility for the 13-week period ended May 4, 2013 totaled $2.7 million (2012: $2.9 million). Interest expense is included in "Finance costs" in the unaudited Condensed Consolidated Statements of Net (Loss) Earnings and Comprehensive (Loss) Income. Also included in "Finance costs" for the 13-week period ended May 4, 2013, was an expense reversal of $0.4 million (2012: expense of $1.6 million) of interest on accruals for uncertain tax positions.

The Company's cash payments for interest on long-term obligations, including the Company's proportionate share of interest on long-term obligations of real estate joint ventures, finance lease obligations, the current portion of long-term obligations and commitment fees on the unused portion of the Credit Facility for the 13-week period ended May 4, 2013 totaled $2.1 million (2012: $2.4 million).

8. Capital stock

During the fourth quarter of the 53-week period ended February 2, 2013, the Company distributed $101.9 million to holders of common shares as an extraordinary cash dividend. Payment in the amount of $1.00 per common share was made on December 31, 2012 to shareholders of record as at the close of business on December 24, 2012.

On May 24, 2011, the Company renewed the Normal Course Issuer Bid with the Toronto Stock Exchange ("TSX") for the period of May 25, 2011 to May 24, 2012 ("2011 NCIB"). Pursuant to the 2011 NCIB, the Company was permitted to purchase for cancellation up to 5% of its issued and outstanding common shares, equivalent to 5,268,599 common shares based on the common shares issued and outstanding as at May 9, 2011. The Company did not renew its 2011 NCIB subsequent to May 24, 2012.

Since the Company did not renew the 2011 NCIB for the 2012 period, there were no share purchases during the 13-week period ended May 4, 2013 (2012: 235,763 shares were purchased for $2.9 million) and cancelled. The impact of the share repurchases in 2012 was a decrease to "Capital stock" and "Retained earnings" in the unaudited Condensed Consolidated Statements of Financial Position of less than $0.1 million and $2.8 million, respectively.

In 2012, Sears Holdings' distributed on a pro rata basis to its shareholders, of a portion of its holdings in the Company such that, immediately following the distribution, Sears Holdings would retain approximately 51% of the issued and outstanding shares of the Company. The distribution was made on November 13, 2012 to Sears Holdings' shareholders of record as of the close of business on November 1, 2012, the record date for the distribution. Every share of Sears Holdings common stock held as of the close of business on the record date entitled the holder to a distribution of 0.4283 of the Company's common shares. In connection with the distribution, the Company filed documents with the United States Securities and Exchange Commission ("SEC").

ESL Investments, Inc., and investment affiliates including Edward S. Lampert, collectively "ESL", together form the ultimate controlling party of the Company. ESL is the beneficial holder of 28,158,368 or 27.6%, of the common shares of the Company as at May 4, 2013 (February 2, 2013: 28,158,368 or 27.6%, April 28, 2012: nil, January 28, 2012: nil). Sears Holdings, the controlling shareholder of the Company, is the beneficial holder of 51,962,391 or 51.0%, of the common shares of the Company as at May 4, 2013 (February 2, 2013: 51,962,391 or 51.0%, April 28, 2012: 97,341,670 or 95.0%, January 28, 2012: 97,341,670.0 or 94.7%). The issued and outstanding shares are fully paid and have no par value.

The authorized common share capital of the Company consists of an unlimited number of common shares without nominal or par value and an unlimited number of class 1 preferred shares, issuable in one or more series (the "Class 1 Preferred Shares").
As at May 4, 2013, the only shares outstanding were common shares of the Company.

9. Revenue

The components of the Company's revenue were as follows: 

(in CAD millions)     13-Week
Period Ended
May 4, 2013
      13-Week
Period Ended
April 28, 2012
(Note 2.4)
Apparel and Accessories   $ 283.6     $ 289.0
Home and Hardlines     218.0       238.7
Major Appliances     192.0       203.2
Other merchandise revenue     57.1       67.0
Services and other     83.7       97.1
Commission and licensee revenue     32.7       33.0
    $ 867.1     $ 928.0

10. Retirement benefit plans

In July 2008, the Company amended its defined benefit plan by introducing a defined contribution component and closing the defined benefit component to new participants. As such, the defined benefit plan continues to accrue benefits related to future compensation increases but no further service credit is earned, and no contributions are made by employees.

The expense for the defined benefit, defined contribution and other benefit plans for the 13-week period ended May 4, 2013 was $2.0 million (2012: $2.5 million), $2.2 million (2012: $2.3 million) and $2.7 million (2012: $3.0 million), respectively. Not included in total retirement benefit plans expense for the 13-week period are short-term disability expenses of $2.5 million (2012: $2.5 million) that were paid from the other benefit plan. These expenses are included in "Selling, administrative and other expenses" in the unaudited Condensed Consolidated Statements of Net (Loss) Earnings and Comprehensive (Loss) Income.

Total cash contributions by the Company to its defined benefit, defined contribution and other benefit plans for the 13-week period ended May 4, 2013 were $9.7 million (2012: $12.4 million).

In the fourth quarter of 2012, the Company made a voluntary offer to settle health and dental benefits of eligible members covered under the non-pension post-retirement plan. Based on the accepted offers, the Company paid $18.1 million and recorded a pre-tax settlement gain of $21.1 million ($21.9 million, net of $0.8 million of expenses). Refer to the 2012 Annual Consolidated Financial Statements for more details.

11. Depreciation and amortization expense

The components of the Company's depreciation and amortization expense, included in "Selling, administrative and other expenses", were as follows:

(in CAD millions)   13-Week
Period Ended
May 4, 2013
    13-Week
Period Ended
April 28, 2012
(Note 2.4)
Depreciation of property, plant and equipment   27.4     29.9
Amortization of intangible assets   2.8     2.4
Total depreciation and amortization expense   30.2     32.3

12. Gain on lease terminations

On March 2, 2012, the Company entered into an agreement to surrender and terminate early the operating leases on three properties: Vancouver Pacific Centre, Chinook Centre (Calgary) and Rideau Centre (Ottawa). The Company was a long-term and important anchor tenant in the three properties, and the landlord approached the Company with a proposal to terminate early the three leases and vacate the premises in exchange for $170.0 million. The payment represented the amount the landlord was willing to pay for the right to redevelop the property based upon their analysis of the potential returns from redevelopment.

On the closing date, April 20, 2012, the Company received cash proceeds of $170.0 million for the surrender of the three leases, resulting in a pre-tax gain of $164.3 million, net of the de-recognition of leasehold improvements of $5.7 million. The Company exited all three properties on October 31, 2012 and has no further financial obligation related to the transaction.

13. Assets and liabilities held for sale

As at May 4, 2013, there were no assets or liabilities held for sale.

On April 24, 2012, the Company entered into an agreement to sell the operations of its subsidiary, Cantrex Group Inc. ("Cantrex"), to Nationwide Marketing Group, LLC for $3.5 million, equal to the net carrying amount of specified Cantrex assets and liabilities. As at April 28, 2012, the assets and liabilities of Cantrex held for sale were separately classified on the Company's unaudited Condensed Consolidated Statements of Financial Position. The major classes of assets and liabilities classified as held for sale were as follows:

(in CAD millions)     As at
April 28, 2012
  Accounts receivable, net   $ 30.8
  Inventories     0.2
  Prepaid expenses     0.3
Current assets classified as held for sale     31.3
  Property, plant and equipment     0.6
Non-current assets classified as held for sale     0.6
Assets classified as held for sale   $ 31.9
       
  Accounts payable   $ 25.1
  Accrued liabilities     3.3
Current liabilities classified as held for sale     28.4
Non-current liabilities classified as held for sale    
Liabilities classified as held for sale   $ 28.4

On April 29, 2012, the Company received the proceeds on the sale, de-recognized the assets and liabilities sold and recorded a gain on sale of nil.

14. Financial instruments

In the ordinary course of business, the Company enters into financial agreements with banks and other financial institutions to reduce underlying risks associated with interest rates and foreign currency. The Company does not hold or issue derivative financial instruments for trading or speculative purposes.

Financial instrument risk management

The Company is exposed to credit, liquidity and market risk as a result of holding financial instruments. Market risk consists of foreign exchange and interest rate risk.

14.1 Credit risk

Credit risk refers to the possibility that the Company can suffer financial losses due to the failure of the Company's counterparties to meet their payment obligations. Exposure to credit risk exists for derivative instruments, cash and cash equivalents, accounts receivable and other long-term assets.

Cash and cash equivalents, accounts receivable and investments included in other long-term assets of $190.5 million as at May 4, 2013 (February 2, 2013: $317.7 million, April 28, 2012: $495.0 million, January 28, 2012: $519.4 million) expose the Company to credit risk should the borrower default on maturity of the investment. The Company manages this exposure through policies that require borrowers to have a minimum credit rating of A, and limiting investments with individual borrowers at maximum levels based on credit rating.

The Company is exposed to minimal credit risk from customers as a result of ongoing credit evaluations and review of accounts receivable collectability. As at May 4, 2013, two customers represented 38.1% of the Company's accounts receivable (February 2, 2013: no customer represented greater than 10.0% of the Company's accounts receivable, April 28, 2012: two customers represented 40.0% of the Company's accounts receivable, January 28, 2012: one customer represented 26.5% of the Company's accounts receivable).

14.2 Liquidity risk

Liquidity risk is the risk that the Company may not have cash available to satisfy financial liabilities as they come due. The Company actively maintains access to adequate funding sources to ensure it has sufficient available funds to meet current and foreseeable financial requirements at a reasonable cost.

The following table summarizes the carrying amount and the contractual maturities of both the interest and principal portion of significant financial liabilities as at May 4, 2013: 

(in CAD millions)     Carrying
Amount
      Contractual Cash Flow Maturities
  Total       Within
1 year
      1 year to
3 years
      3 years to
5 years
      Beyond
5 years
Accounts payable and accrued liabilities   $ 463.3     $ 463.3     $ 463.3     $     $     $
Finance lease obligations including
payments due within one year 1
    34.7       46.4       7.5       10.9       9.7       18.3
Real estate joint venture obligations
including payments due within one year 2
    22.3       26.9       5.5       10.9       5.4       5.1
Operating lease obligations 3     n/a       504.0       99.4       163.4       106.5       134.7
Royalties 3     n/a       1.8       1.3       0.5            
Purchase agreements 3,5     n/a       20.6       6.5       13.0       1.1      
Retirement benefit plans obligations 3,4     415.5       107.6       29.3       58.7       19.6      
    $ 935.8     $ 1,170.6     $ 612.8     $ 257.4     $ 142.3     $ 158.1

1 Cash flow maturities related to finance lease obligations, including payments due within one year, include annual interest on finance lease obligations at a weighted average rate of 7.6%. The Company had no borrowings on the Credit Facility at May 4, 2013.
2 Cash flow maturities related to real estate joint venture obligations, including payments due within one year, include annual interest on mortgage obligations at a weighted average rate of 7.8%.
3 Purchase agreements, operating lease obligations, retirement benefit plans funding obligations and royalties are not reported in the Unaudited Condensed Consolidated Statements of Financial Position.
4 Payments beyond 2013 are subject to a funding valuation to be completed as at December 31, 2013. Until then, the Company is obligated to fund in accordance with the most recent valuation completed as at December 31, 2010.
5 Certain vendors require minimum purchase commitment levels over the term of the contract.

Of the $504.0 million of operating lease commitments disclosed in the table above, $7.7 million relates to the Company's proportionate share of the commitments of its real estate joint ventures.

Management believes that cash on hand, future cash flow generated from operations and availability of current and future funding will be adequate to support these financial liabilities.

Market risk

Market risk exists as a result of the potential for losses caused by changes in market factors such as foreign currency exchange rates, interest rates and commodity prices.

14.3 Foreign exchange risk

The Company enters into foreign exchange contracts to reduce the foreign exchange risk with respect to U.S. dollar denominated assets and liabilities and purchases of goods or services. As at May 4, 2013 and April 28, 2012, there were no contracts outstanding and therefore no derivative financial assets nor derivative financial liabilities were recognized in the unaudited Condensed Consolidated Statements of Financial Position.

During the 13-week period ended May 4, 2013, the Company recorded a loss of $0.8 million (2012: gain of $1.8 million), relating to the translation or settlement of U.S. dollar denominated monetary items consisting of cash and cash equivalents, accounts receivable and accounts payable.

The period end exchange rate was 0.9923 U.S. dollar to Canadian dollar. A 10% appreciation or depreciation of the U.S. and or the Canadian dollar exchange rate was determined to have an after-tax impact on net (loss) earnings of $4.9 million for U.S. dollar denominated balances included in cash and cash equivalents, accounts receivable and accounts payable.

14.4 Interest rate risk

From time to time, the Company enters into interest rate swap contracts with approved financial institutions to manage exposure to interest rate risks. As at May 4, 2013, the Company had no interest rate swap contracts in place.

Interest rate risk reflects the sensitivity of the Company's financial condition to movements in interest rates. Financial assets and liabilities which do not bear interest or bear interest at fixed rates are classified as non-interest rate sensitive.

Cash and cash equivalents and borrowings under the secured revolving credit facility are subject to interest rate risk. The total subject to interest rate risk as at May 4, 2013 was a net asset of $111.0 million (February 2, 2013: net asset of $239.8 million, April 28, 2012: net asset of $366.3 million, January 28, 2012: net asset of $300.5 million). An increase or decrease in interest rates of 0.25% would cause an immaterial after-tax impact on net (loss) earnings.

14.5 Classification and fair value of financial instruments

The estimated fair values of financial instruments presented are based on relevant market prices and information available at those dates. The following table summarizes the classification and fair value of certain financial instruments as at the specified dates. The Company determines the classification of a financial instrument when it is initially recorded, based on the underlying purpose of the instrument. As a significant number of the Company's assets and liabilities, including inventories and capital assets, do not meet the definition of financial instruments, values in the tables below do not reflect the fair value of the Company as a whole.

The fair value of financial instruments are classified and measured according to the following three levels, based on the fair value hierarchy.

  • Level 1: Quoted prices in active markets for identical assets or liabilities
  • Level 2: Inputs other than quoted prices in active markets that are observable for the asset or liability either directly (i.e. as prices) or indirectly (i.e. derived from prices)
  • Level 3: Inputs for the asset or liability that are not based on observable market data

(in CAD millions)                                
Classification   Balance Sheet Category   Fair Value
Hierarch1
  As at
May 4, 2013
    As at
February 2, 2013
    As at
April 28, 2012
    As at
January 28, 2012
Available for sale                                
  Cash equivalents   Cash and cash equivalents1   Level 1       159.9     239.9     199.9
  Cash equivalents   Cash and cash equivalents1   Level 2   20.6     20.5     20.3     20.3
Fair value through profit or loss                                
  Long-term investments   Other long-term assets   Level 1   0.2     0.2     0.2     0.2
  Long-term investments   Other long-term assets   Level 3   1.3     1.3     1.3     1.3

1   Interest income related to cash and cash equivalents is disclosed in Note 5.

All other assets that are financial instruments not listed in the chart above have been classified as "Loans and receivables". All other financial instrument liabilities have been classified as "Other liabilities" and are measured at amortized cost in the unaudited Condensed Consolidated Statements of Financial Position. The carrying value of these financial instruments approximate fair value given that they are short-term in nature.

Effective March 3, 2013, the Company finalized an exclusive, multi-year licensing arrangement with SHS, which will result in SHS overseeing the day-to-day operations of all HIPS.  SHS will pay the final purchase price of $5.3 million over 6 years.  The loans and receivables asset is included in "Other long-term assets" in the unaudited Condensed Consolidated Statements of Financial Position.

As part of the transaction, SHS granted the Company a call option which, if exercised would require SHS to sell the Company a 20% interest in the HIPS business.  The call option can be exercised beginning March 3, 2013 until March 2, 2023.

15. Contingent liabilities

15.1 Legal Proceedings

The Company is involved in various legal proceedings incidental to the normal course of business. The Company takes into account all available information, including guidance from experts (such as internal and external legal counsel) at the time of reporting to determine if it is probable that a present obligation (legal or constructive) exists, if it is probable that an outflow of resources embodying economic benefit will be required to settle such obligation and whether the Company can reliably measure such obligation at the end of the reporting period. The Company is of the view that, although the outcome of such legal proceedings cannot be predicted with certainty, the final disposition is not expected to have a material adverse effect on the Company's unaudited Condensed Consolidated Financial Statements.

15.2 Commitments and guarantees

Commitments

As at May 4, 2013, cash and cash equivalents that are restricted represent cash and investments pledged as collateral for letter of credit obligations issued under the Company's offshore merchandise purchasing program of $9.7 million (February 2, 2013: $9.0 million, April 28, 2012: $6.4 million, January 28, 2012: $7.2 million), which is the Canadian equivalent of U.S. $9.6 million (February 2, 2013: U.S. $9.0 million, April 28, 2012: U.S. $6.5 million, January 28, 2012: U.S. $7.2 million).

The Company has certain vendors which require minimum purchase commitment levels over the term of the contract. Refer to Note 14.2 "Liquidity Risk".

Guarantees

The Company has provided the following significant guarantees to third parties:

Royalty License Agreements

The Company pays royalties under various merchandise license agreements, which are generally based on the sale of products. Certain license agreements require a minimum guaranteed payment of royalties over the term of the contract, regardless of sales. Total future minimum royalty payments under such agreements were $1.8 million as at May 4, 2013 (February 2, 2013: $2.3 million, April 28, 2012: $2.8 million, January 28, 2012: $3.1 million).

Other Indemnification Agreements

In the ordinary course of business, the Company has provided indemnification commitments to counterparties in transactions such as leasing transactions, royalty agreements, service arrangements, investment banking agreements and director and officer indemnification agreements. The Company has also provided certain indemnification agreements in connection with the sale of the credit and financial services operations in November 2005. The foregoing indemnification agreements require the Company to compensate the counterparties for costs incurred as a result of changes in laws and regulations, or as a result of litigation or statutory claims, or statutory sanctions that may be suffered by a counterparty as a consequence of the transaction. The terms of these indemnification agreements will vary based on the contract and typically do not provide for any limit on the maximum potential liability. Historically, the Company has not made any significant payments under such indemnifications and no amounts have been accrued in the consolidated financial statements with respect to these indemnification commitments.

16. Net (loss) earnings per share

A reconciliation of the number of shares used in the net (loss) earnings per share calculation is as follows: 

(Number of shares)   13-Week
Period Ended
May 4, 2013
    13-Week
Period Ended
April 28, 2012
Weighted average number of shares per basic net
(loss) earnings per share calculation
  101,877,662     102,558,643
Effect of dilutive instruments outstanding      
Weighted average number of shares per diluted net
(loss) earnings per share calculation
  101,877,662     102,558,643

"Net (loss) earnings" as disclosed in the unaudited Condensed Consolidated Statements of Net (Loss) Earnings and Comprehensive (Loss) Income was used as the numerator in calculating the basic and diluted net (loss) earnings per share. For the 13-week period ended May 4, 2013, the Company incurred a net loss and therefore all potential common shares were anti-dilutive. For the 13-week period ended April 28, 2012, 9,920 outstanding options were excluded from the calculation of diluted net earnings per share as they were anti-dilutive.

17. Income taxes

The Company's total net cash refunds or payments of income taxes for the 13-week period ended May 4, 2013 was a net payment of $8.0 million (2012: net refund of $7.8 million).

In the ordinary course of business, the Company is subject to ongoing audits by tax authorities. While the Company believes that its tax filing positions are appropriate and supportable, periodically, certain matters are challenged by tax authorities. During the 13-week period ended May 4, 2013, the Company recorded benefits for interest on prior period tax re-assessments and accruals for uncertain tax positions as described in the table below, all included in the unaudited Condensed Consolidated Statements of Net (Loss) Earnings and Comprehensive (Loss) Income as follows:

(in CAD millions)     13-Week
Period Ended
May 4, 2013
      13-Week
Period Ended
April 28, 2012
Finance costs reduction (increase)   $ 0.4     $ (1.6)
Income tax recovery (expense):              
  Current   $ 0.5     $ (1.6)
  Deferred   $ (0.1)     $ 0.4
Net benefits (charges) on uncertain tax positions   $ 0.8     $ (2.8)

As the Company routinely evaluates and provides for potentially unfavourable outcomes with respect to any tax audits, the Company believes that the final disposition of tax audits will not have a material adverse effect on its liquidity.

Included in "Other long-term assets" in the unaudited Condensed Consolidated Statements of Financial Position as at May 4, 2013, were receivables of $14.7 million (February 2, 2013: $13.9 million, April 28, 2012: $30.3 million, January 28, 2012: $30.3 million) related to payments made by the Company for disputed tax assessments.

18. Segmented information

In order to identify the Company's reportable segments, the Company uses the process outlined in IFRS 8, which includes the identification of the Chief Operating Decision Maker, the identification of operating segments, which has been done based on Company formats, and the aggregation of operating segments. The Company has aggregated its operating segments into two reportable segments: Merchandising and Real Estate Joint Venture operations.  The Merchandising segment includes revenues from the sale of merchandise and related services to customers.  Real Estate Joint Venture segment includes income from the Company's joint venture interests in shopping centres across Canada, most of which contain a Sears store.

18.1 Segmented Statements of Earnings

(in CAD millions)   13-Week
Period Ended
May 4, 2013
      13-Week
Period Ended
April 28, 2012
(Note 2.4)
      53-Week
Period Ended
February 2, 2013
(Note 2.4)
Total revenue                    
  Merchandising $ 856.4     $ 915.1     $ 4,300.7
  Real Estate Joint Ventures   10.7       12.9       45.8
Total revenues $ 867.1     $ 928.0     $ 4,346.5
Segmented operating loss                    
  Merchandising $ (44.4)     $ (58.8)     $ (81.5)
  Real Estate Joint Ventures   2.9       3.8       9.7
Total segmented operating loss $ (41.5)     $ (55.0)     $ (71.8)
Finance Costs                    
  Merchandising $ 1.9     $ 4.0     $ 13.3
  Real Estate Joint Ventures   0.4       0.5       1.8
Total finance costs $ 2.3     $ 4.5     $ 15.1
Interest Income                    
  Merchandising $ 0.2     $ 0.5     $ 4.1
  Real Estate Joint Ventures   0.2       0.1       0.2
Total interest income $ 0.4     $ 0.6     $ 4.3
Unusual items                    
  Merchandising $     $ 164.3     $ 188.2
  Real Estate Joint Ventures               8.6
Total unusual items $     $ 164.3     $ 196.8
Income taxes                    
  Merchandising $ 12.2     $ (12.4)     $ (13.0)
  Real Estate Joint Ventures         0.1      
Total income taxes recovery (expense) $ 12.2     $ (12.3)     $ (13.0)
Net (loss) earnings $ (31.2)     $ 93.1     $ 101.2




18.2 Segmented Statements of Total Assets

(in CAD millions)       As at
May 4, 2013
      As at
February 2, 2013
(Note 2.4)
      As at
April 28, 2012
(Note 2.4)
      As at
January 28, 2012
(Note 2.4)
Merchandising     $ 2,121.7     $ 2,210.8     $ 2,441.7     $ 2,425.6
Real Estate Joint Ventures       295.8       293.9       339.3       341.8
Total assets     $ 2,417.5     $ 2,504.7     $ 2,781.0     $ 2,767.4




18.3 Segmented Statements of Total Liabilities

(in CAD millions)       As at
May 4, 2013
      As at
February 2, 2013
(Note 2.4)
      As at
April 28, 2012
(Note 2.4)
      As at
January 28, 2012
(Note 2.4)
Merchandising     $ 1,345.5     $ 1,402.7     $ 1,562.3     $ 1,638.7
Real Estate Joint Ventures       26.8       25.6       36.4       36.7
Total liabilities     $ 1,372.3     $ 1,428.3     $ 1,598.7     $ 1,675.4

19. Changes in non-cash working capital balances

Cash used for non-cash working capital balances were comprised of the following:

(in CAD millions)     13-Week
Period Ended
May 4, 2013
      13-Week
Period Ended
April 28, 2012
(Note 2.4)
Accounts receivable, net   $ (1.5)     $ (16.6)
Inventories     (39.7)       (60.0)
Prepaid expenses     0.1         (6.9)
Accounts payable and accrued liabilities     (25.9)       35.7
Deferred revenue     2.3         5.7
Provisions     (13.5)       (10.4)
Income and other taxes payable and recoverable     (14.2)       (9.7)
Effect of foreign exchange rates     (0.1)       0.5
Cash used for non-cash working capital balances   $ (92.5)     $ (61.7)



20. Changes in long-term assets and liabilities

Cash used for long-term assets and liabilities were comprised of the following:

(in CAD millions)     13-Week
Period Ended
May 4, 2013
      13-Week
Period Ended
April 28, 2012
(Note 2.4)
Other long-term assets   $ 0.2     $ (0.4)
Other long-term liabilities     (5.9)       (2.1)
Other     (0.6)       (0.3)
Cash used for long-term assets and liabilities   $ (6.3)     $ (2.8)



21. Event after the reporting period

On May 22, 2013, the Company announced its intention to file with the Toronto Stock Exchange ("TSX") a Notice of Intention to make a Normal Course Issuer Bid that permits the Company to purchase for cancellation up to 5% of its issued and outstanding common shares, representing 5,093,883 of the issued and outstanding common shares.  There are 101,877,662 common shares issued and outstanding, as at May 10, 2013.  Under the Normal Course Issuer Bid, which requires TSX approval, purchases may commence on May 24, 2013 and must terminate by May 23, 2014 or on such earlier date as the Company may complete its purchases pursuant to the Notice of Intention filed with the TSX.  The total purchase of common shares by the Company pursuant to its Normal Course Issuer Bid will not exceed, in the aggregate, 5% of all outstanding common shares, and will be subject to the limits under the TSX rules, including a daily limit of 25% of the average daily trading volume, and a limit of one block purchase per week. 

SOURCE Sears Canada Inc.

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